Over the last few months our industry has heard from Regulators in Singapore, United States. South Korea and China with regards to Initial Coin Offerings and Token transactions facilitated by Coin / CCY Exchangers. In our view, much of this rush to judgement has very little to do with legitimate Functional Tokens (like Bitquence) and more to do with those firms in our industry who unknowingly offer Tokenized Securities, which promise ownership rights, and those individuals or firms involved in outright fraudulent activities.
Unless our industry can find a way to cleanse our eco-system of these bad actors and increase our overall commitment to consumer protection, I’m afraid the end result will only be a significant increase in the velocity of regulator opinions. As an industry with significant potential, it is absolutely essential that we get our act together and begin to remove scammers from our eco-system immediately while also clearly distinguishing Functional Tokens from Tokenized Securities by developing an industry wide template for the future issuance of pure Functional Tokens. Unless we begin to take these necessary steps, together, the risks of rules being thrust upon our industry will grow ever larger with every passing day. To avoid this end, Bitquence has fully committed itself to doing whatever is necessary to ensure the long term sustainability of this industry.
Back to more specific recent events. As most of you know by now, the Chinese Government issued a policy statement on Monday banning local companies from offering ICO’s onshore. However, what most people overlooked, a day earlier the South Korean Government showed the clearest posture to date by a report that stated the local government has every intention of regulating cryptocurrencies, which will most likely occur sooner rather than later. These are all the very reasons why we adopted our strategy to design the Bitquence Platform with the full understanding that our industry will be heavily regulated. I know global users in the space may not like the idea of regulations within our global eco-system but we need to accept this reality as it is indicative of the serious and powerful potential of our industry. Regulations just mean that we are moving to the big stage, it’s “Prime Time”!
Considering all of the above, let us breakdown China’s most recent Crypto Policy Stance (Please see our interpreted translation of their actual announcement at the end of this blog). Before we begin, let us all be reminded that government opinions such as these should not come as a surprise to any firm in this space who has done proper planning and developed comprehensive strategic plans. We at Bitquence were not caught off-guard by any of this for this very reason.
Our Translation of their Announcement: (Both systematic and human translation tools)
The recent public issuance of token financing activities, including those initial tokens (ICO), has increased in large numbers where these highly speculative activities may involve companies suspected of engaging in illegal financial activities, which could seriously disrupt the economic and financial order. In accordance with the Law of the People’s Bank of China, the Commercial Bank Law of the People’s Republic of China, the Securities Law of the People’s Republic of China, the People’s Republic of China, the People’s Republic of China, the People’s Republic of China, the People’s Republic of China, the People’s Republic of China, the People’s Republic of China, the People’s Republic of China, the People’s Republic of China, the People’s Republic of China, The Republic of China Network Security Law, the People’s Republic of China Telecommunications Ordinance, and other laws and regulations, the relevant matters involving illegal financial institutions and illegal financial business activities are as follows:
- Accurate understanding of the essential attributes of tokens financing activities
Token Offering financing refers to financing via illegal sale and circulation of tokens, and raising funds from investors in the form of Bitcoin, Ethereum and other so-called “virtual currency”. This activity is essentially a non-approved illegal public financing method, suspected of illegal sale of Tokens, illegal issuance of securities, illegal fund-raising, financial fraud, pyramid schemes and other criminal activities. The relevant departments will closely monitor the situation, strengthen cooperation with the judicial departments and local governments, in accordance with the existing working mechanism, strict law enforcement, resolutely control the market chaos. Any discovered suspected criminal problems should be transferred to the judiciary.
The tokens or “virtual currency” used in Token Offering are not issued by the monetary authorities, do not have legal and monetary properties such as indemnity and coercion, do not have legal status equivalent to currency, and can not and should not be circulated as money in the market.
- No organization or individual may engage in unauthorized Token Offering financing activities
As of the date of this announcement, all types of Token Offering financing activities shall cease immediately. Organizations and individuals who have completed the financing of the tokens should make arrangements for repatriation, reasonably protect the interests of investors and properly handle the risks. The relevant departments will seriously investigate and deal with non-discontinuation of tokens sale financing activities and illegal activities related to already completed token offering financing.
- Strengthen the management of tokens and financing trading platform
As at the date of this announcement, any so-called token financing and trading platform may not engage in the business of exchanging legal currency with tokens and “virtual currency”; may not buy, sell, or act as intermediary for buying and selling of tokens or “virtual currency”; may not engage in the service of providing pricing and information of tokens or “virtual currency”.
For the existing illegal token offering financing trading platform, the financial management department will be refer the companies to the telecommunications authorities in accordance with the law to close their website platform and mobile APP, to the internet authorities to the delist and remove their mobile APP from app stores, and to the business administration authorities to revoke their business licenses.
- Financial institutions and non-bank payment institutions shall not carry out business related to tokens financing transactions
Financial institutions and non-bank payment agencies may not directly or indirectly provide products or services related to token financing transactions involving “virtual currency” including account opening, registration, trading, liquidation, settlement and other products or services, as activities involving tokens and “virtual currency” shall not be covered within the scope of their insurance liability. Financial institutions and non-bank payment agencies should promptly report to the relevant departments if they suspect the illegal issuance of financing transactions involving virtual currency.
- The public should be highly alert to the risk of currency issuance financing and trading risks
There are multiple risks in the issuance of coins and transactions, including false asset risk, risk of business failure, and risk of investment speculation. Investors are required to bear the risk of investment. We hope that the majority of investors will not be deceived. Due to the use of “currency” of the various types for illegal financial activities, the public should strengthen their ability to recognize illegal activities and increase their awareness of risk and timely reporting relevant activities they may suspect to be illegal.
- Give full play to the role of industry organizations self-discipline
All financial industry organizations should carefully interpret policy, and urge their members to consciously resist illegal financing activities related to the issuance of virtual currency for financing transactions, and strengthen investor education to protect against market chaos and jointly maintain the normal financial order.
Making Sense of the Ban
First, what does this policy stance cover? It covers only China based firms wishing to launch, or previously launched,ICO’s occurring in country (Not anything offshore) AND China based Trading Platforms who facilitate the exchange of tokens or “convert” tokens with fiat whenever any of these activities involve China Residents (Not anything offshore).
Second, what does this mean? This means China based ICO’s involving China resident participants are on hold for the foreseeable future. It is not entirely clear to us if China based ICO’s can, however, be offered offshore to non-China residents. China based Trading Platforms can continue to facilitate trading of tokens and virtual currencies for offshore customers but cannot facilitate trading of tokens or convert tokens directly with fiat in country / onshore for China Residents unless it is part of the repatriation process related to previous token sales.This last point is a bit at odds with itself as allowing offshore exchanging by locally based Exchangers conflicts with the overall reasons for China Regulators to act so I think this point should not be overlooked as further clarity is needed.
Third, in our view this policy action is driven by several key factors including consumer fraud and illegal securities issuance but more importantly to ensure these activities do not skirt China’s Foreign Direct Investment (FDI), Outbound Direct Investment (ODI) Schemes and other capital outflow mechanisms such as its Qualified Domestic Limited Partnership (QDLP) or Qualified Domestic Institutional Investor (QDII) programs, which are all considered by the Government to be necessary tools for protecting the overall soundness of their capital market system.
However, as Token Sales involving the issuance of pure “Functional Tokens”, rather than Tokenized Securities, clearly do NOT involve foreign ownership concerns I believe local firms in China will be able to offer legitimate Token Sales once the dust has settled. Additionally, I also believe foreign based Token Sales involving pure Functional Tokens offered to China residents will also be possible at some point in the near future. Although, for both of these things to happen, China will first need to revisit all of its inbound / outbound capital flow policies and securities laws to ensure virtual currency based financing activities do not go unchecked. This will surely take some time but they are inevitable in our view as China has been investing significant amounts of public capital in Blockchain and Smart Contract Technologies and it is highly unlikely that cryptocurrencies will not be a part of their eco-system going forward.
From Bitquence’ perspective, none of these actions impact our business, past or present. As many of you know, we’re able to limit disruption to our business model as we made a conscious decision early on to build our platform based on the critical assumption that existing securities / investment related laws will apply to crypto businesses. This was a critical decision for us as it allows us to limit all current and future disruption to our business. Thus, we continue unabated in our development efforts.
Lastly, we do want to make one very important point. All of the steps taken by local regulators are or will be premised on protecting consumers. Bitquence embraces these changes for these very reasons, as we also share the commitment to protect global consumers. As such, we are fully committed to collaborating with regulators in any jurisdiction who seek to better understand our industry.